IPOs: Meituan-Dianping Heads List of Money-Losing New Listings

Bottom line: Meituan-Dianping's IPO is likely
to meet with lukewarm reception due to its big losses in several
key areas, but could become more attractive over the medium term as
it emerges as industry leader in one or two key areas.

As the rest of China continues to fixate on the sex scandal
surrounding e-commerce giant JD.com's (Nasdaq: JD) CEO, I thought I
would end the week on a less controversial subject with a look at
another blockbuster IPO by online-to-offline services giant
Meituan-Dianping. The company has officially filed to make a
listing in Hong Kong, and could be one of a growing number of
Chinese Internet firms to choose the former British colony over the
U.S. following a rule change earlier this year.

That change allowed companies to list in Hong Kong using a
dual-class share structure that gives disproportionate voting power
to company managers over ordinary shareholders. Previous
prohibition of such a structure was the key element that led
e-commerce giant Alibaba (NYSE: BABA) to make its own
record-breaking IPO in New York instead of Hong Kong in 2014, and
no doubt Hong Kong is still smarting over that loss.

All that said, Meituan-Dianping is no Alibaba, though it's
certainly quite a large company and a leader in several areas on
China's Internet. Most notably, the company is a huge money loser,
thanks in no small part to its desire to try and muscle in on three
of the most competitive areas on China's online-to-offline (O2O)
Internet, namely shared bikes, takeout delivery and Uber-like car
services.

The company is aiming to raise up to $4.4 billion in its
upcoming Hong Kong IPO, which could make it the year's third
largest listing if it reaches that target, behind only smartphone
maker Xiaomi (HKEx: 1810) and cellular tower operator China Tower
(HKEx: 0788), which both also listed in Hong Kong. (English
article) Unlike many of China's other Internet companies to list
this year, Meituan-Dianping is a relative old timer.

The company was formed a few years ago through a merger of two
major O2O companies, both with their roots in group buying
following the early success of US giant Groupon (Nasdaq: GRPN).
China saw an explosion of group buying firms around the time that
Groupon burst onto the scene. That was followed by a bloody
consolidation that left Meituan and Dianping as the two last big
dogs standing, and those two later combined as well.

Aggressive Expansion

Not content to rest on its group buying laurels, which
included a healthy restaurant ratings business similar to US giant
Yelp (NYSE: YELP), Meituan, under the leadership of a brash and
aggressive man named Wang Xing, has been seeking to follow in the
footsteps of China's other Internet titans. Wang has rushed into a
number of new areas that I've described above, including the most
recent that saw his firm acquire massively money-losing shared bike
operator Mobike this spring for $2.7 billion.

At the same time, Meituan-Dianping is also operating a
similarly massively loss-making takeout dining service that
competes with Alibaba's Ele.me. It also launched a car ride
services firm that competes with market leader Didi Chuxing, but
has indicated in its IPO prospectus that it won't expand that
service and could quite possibly shut it down to stem its
losses.

The bottom line is that Meituan-Dianping reported a massive
18.9 billion yuan ($2.8 billion) loss last year, far bigger than
the 5.8 billion yuan loss in 2016. Things appeared to improve in
the first four months of this year, when the loss was just 2
billion yuan. Still, multibillion-yuan losses are hardly that
attractive for a company of Meituan's age and getting ready to go
public.

The company has a powerful backer in the form of social
networking and gaming giant Tencent (HKEx: 700), which has pledged
to buy a big chunk of the IPO shares. But there's no guarantee that
Tencent will continue to support Meituan-Dianping indefinitely,
especially as Tencent faces its own issues in China's gaming
market. (previous post).

At the end of the day, much will depend on how this company
can do in the bike sharing and takeout dining businesses. If China
continues its previous pattern where ultra competitive sectors
ultimately get consolidated to a single player, I would say that
Meituan probably has a winner with Mobike, since its only remaining
major rival Ofo looks quite a bit shakier at the moment. But the
jury is really still out as to whether there's even a viable
business model at all with shared bikes.

I would give Meituan less chance to emerge the winner with
takeout dining, since Ele.me looks quite a bit stronger since it
got acquired by Alibaba. Then there's Meituan's core group buying
and restaurant rating business, which looks ok but isn't all that
exciting in terms of growth. On the whole, I would say this company
probably has at least another year or two of big losses in front of
it, though it will probably end up as a relatively attractive
option over the medium term as it emerges as industry leader in one
or two key areas and eventual becomes profitable.